SEC Division of Enforcement Co-Director Stephanie Avakian described measures taken by the Division to protect retail investors and address share class disclosure issues.
In an address at the 2019 SEC Regulation Outside the United States Conference, Ms. Avakian explained that the Share Class Selection Disclosure initiative ("initiative") was launched as part of the Division's effort to address issues affecting investors' returns on investments. She said that the initiative was designed as a self-reporting opportunity for firms to rectify possible violations promptly and return money to harmed investors. Ms. Avakian emphasized the importance of investors being able to make informed investment decisions, including being made aware of any conflicts of interest.
Ms. Avakian further explained that the SEC is actively looking for other undisclosed conflicts of interest. She said that the SEC is paying attention to:
- Revenue sharing-certain share classes may be on a platform where an advisor or its broker-dealer receives a portion of the revenue sharing, as opposed to other less expensive share classes; similarly, investors may be directed to a product that pays more to the adviser or affiliate than a product that would be better for the investor;
- Cash-sweep arrangements–a dually registered adviser or an adviser with an affiliated broker-dealer may have a financial interest or conflict if they advise customers to make a cash investment that pays the adviser a higher return;
- Teacher Retirement Plans-administrators of teacher retirement plans may recommend investment options without disclosing conflicts of interest and, in particular, without disclosing certain fees or lower-fee alternatives.
Commentary
Steven Lofchie
Cash management appears likely to be a principal focus of the SEC for the next year. As trade execution fees drop, even to zero, and Regulation Best Interest imposes further regulatory burdens on firms that make recommendations to retail investors, the business of being a full-service broker-dealer for retail investors is facing a lot of challenges.
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